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Reckless Stock-Market Leverage Intoxicates Politicians
Reckless Stock-Market Leverage Intoxicates Politicians
The sudden bloodletting that leveraged currency speculators experienced when the Swiss National Bank yanked the cap on the franc should have been a warning: central-bank promises that everything is under control are meaningless. And because of leverage, innumerable trading accounts blew up in a matter of moments.
Leverage acts like a powerful drug. It creates buying pressure and inflates asset prices further on the way up. But when asset prices sink, leverage begets forced selling, which drives down asset prices further, which begets more forced selling….
And stock-market leverage, encouraged by the Fed’s monetary policies that make nearly free money available to all sorts of speculators, has ballooned.
Some of it is closely watched, like margin debt. FINRA’s 4,000 member securities firmsreported that their customers carried $496 billion in margin debt by the end of December, after a multi-year surge. Margin balances had peaked in September at $504 billion, by far the highest in absolute terms, and at 2.8% of GDP, the highest ever in relationship to the economy. Alas, the last two stock-market leverage bubbles ended in phenomenal crashes – the dotcom implosion and the Financial Crisis.
And corporations are issuing mountains of debt to buy back their own shares at peak prices – replacing equity with debt on their balance sheets, leveraging them up to the hilt, like others leverage up their brokerage accounts. In many cases, such as IBM, “tangible net worth” has turned negative, and stockholders are already under water.
Other forms of stock-market leverage are more difficult to quantify, like people borrowing against their home equity lines of credit or their credit cards to plow that moolah into stocks to make that quick buck that their neighbors have been bragging about.
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China’s Monumental Debt Trap—-Why It Will Rock The Global Economy
China’s Monumental Debt Trap—-Why It Will Rock The Global Economy
Bloomberg News finally did something useful this morning by publishing some startling graphs from McKinsey’s latest update on the worldwide debt tsunami. If you don’t mind a tad of rounding, the planetary debt total now stands at $200 trillion compared to world GDP of just $70 trillion.
The implied 2.9X global leverage ratio is daunting in itself. But now would be an excellent time to recall the lessons of Greece because the true implications are far more ominous.
Today’s raging crisis in Greece was hidden from view for many years in the run-up to its first EU bailout in 2010 because the denominator of its reported leverage ratio—national income or GDP—–was artificially inflated by the debt fueled boom underway in its economy.
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oftwominds-Charles Hugh Smith: What Happens When Cash Is No Longer Trash?
oftwominds-Charles Hugh Smith: What Happens When Cash Is No Longer Trash?.
Those who actually create value as opposed to chasing yield with nearly-free money will actually have some traction once the swamp of excess liquidity drains.
When those closest to the money spigots of the Federal Reserve can borrow billions for next to nothing, cash–laboriously saved from years of paychecks–is reduced to trash. What chance does a saver have in a bidding war for a house or other asset against a financier who can borrow essentially unlimited cash?
oftwominds-Charles Hugh Smith: In Uncharted Waters
ftwominds-Charles Hugh Smith: In Uncharted Waters.
What I see as extremes that must necessarily end badly, others see as mere extensions of recently successful policies and trends.
A long-time reader recently chastised me for using too many maybe’s in my forecasts. The criticism is valid, as “on the other hand” slips all too easily from qualifying a position to rinsing it of meaning.
That said, given that we’re in uncharted waters, maybe’s become prudent and certainty becomes extremely dangerous. I have long held that the financial policy extremes that are now considered normal are unprecedented in the modern era: extremes in debt, leverage, risk, complexity and willful obfuscation of these extremes.
